江森自控 (JCI) 2010 Q2 法說會逐字稿

Welcome to the Tyco first quarter earnings conference call.

At this time all participants have been placed on a listen only mode until the question and answer session.

(Operator Instructions) This call is being recorded.

If you have any objections please disconnect at this time.

I will now turn the call over to Mr Ed Arditte, Senior Vice President Strategy and Investor Relations.

Sir you may begin.

Thank you.

Good morning and thanks to everybody for joining our conference call to discuss Tyco's second quarter results for fiscal year 2010 and the press release that we issued earlier this morning.

With me on today's call are Tyco's Chairman and Chief Executive Officer, Ed Breen, and our Chief Financial Officer, Chris Coughlin.

Let me start by reminding you that during the course of the call we will be providing certain forward-looking information.

We ask you to look at today's press release and read through the forward-looking cautionary informational statements that we've included there.

In addition, we will use certain non-GAAP measures in our discussions and we ask you to read through the sections of our press release that address the use of these items.

The press release issued this morning and all related tables, as well as the conference call slides, can be found on in the Investor Relations portion of our website at tyco.com.

Also, with regard the pending Broadview acquisition, the discussion during today's conference call did not constitute an offer to sell or the solicitation to buy any securities or solicitation of any vote or approval.

The subject matter discussed today related to the Broadview acquisition is addressed in a registration statement on Form S-4 containing a proxy statement and prospectus, which is publicly available and has been filed by Tyco with the SEC.

We urge you to read it.

Now, let me quickly recap this quarter's results.

Revenue in the quarter of $4.2 billion was up slightly year-over-year, with an organic revenue decline of 5.8%.

Earnings per share from continuing operations attributable to Tyco common shareholders was $0.65 per share and included income of $0.06 per share from special items.

Before special items, earnings per share was $0.59, and this compared to our guidance of $0.50 to $0.52 per share.

Before I turn the call over to Ed, let me quickly touch on the Broadview acquisition.

We expect the transaction to close on May 14, pending the Brinks shareholder vote on May 12.

We will provide a detailed financial update on the acquisition in our next quarterly call.

Now, with that, let me turn the call over to Ed Breen.

Thanks, Ed, and good morning, everyone.

The second quarter was a good quarter for Tyco on a number of fronts, and importantly, we exited the quarter feeling encouraged by both our performance and an improving tone in some of our end markets.

Our results for the quarter continue to be driven by our cost containment efforts, coupled with the continued growth of our recurring revenue and service activities.

In addition to our operating performance, the quarter also saw a number of other positive developments, including, first, our agreement to acquire Broadview Security and combine it with ADT.

Second, the sale of our French security business, which was a meaningful step in repositioning our ADT business in Europe.

Third, an increase in our annual dividend, and lastly, an upgrade in our debt rating from Standard and Poor's to single A-minus.

Let me start off with a few overall operational comments and then a few thoughts in what we are seeing in each of our businesses.

First, our teams continue to execute well on our cost reduction and restructuring programs, and our restructuring actions will ramp up in the second half of the year.

As you all know, we expect our organic revenue to be modestly negative in 2010, lower in the first half of the year, with improvement in the second half of the year.

And managing our cost structure to match up with our revenue outlook has been a major focus for us.

These efforts continue to pay off and are reflected in our operating margin performance, which was up nicely year-over-year.

We are also doing a nice job from an asset management perspective.

Our working capital performance continues to be solid, and we are in a strong position with respect to both receivables and inventory.

In addition, our free cash flow generation continues to be strong, and we are almost $200 million ahead of the last year's number through the first half of the fiscal year.

On a full-year basis, we continue to expect free cash flow to approximate net income.

We are also continuing to fully fund our organic growth investment activities in Security, Fire, and Flow Control.

Year-to-date, our capital spending levels have grown modestly on a year-over-year basis, with a high percentage of our capital going to growth investments.

We also continue to fund increases in R&D, particularly in our emerging market R&D centers, and our R&D expense increased about 4% year-over-year.

From a balance sheet perspective, our cash balance was about $2.7 billion at the end of the quarter, and we expect to use some of this to fund the Broadview acquisition.

We are also contemplating bolt-on acquisitions that would use up to an additional $500 million.

Even with these cash uses, we will still be in a strong cash position, so we expect to resume repurchasing shares soon after we close the Broadview acquisition.

I also want to add that we continue to be pleased with everything we see in the Broadview integration planning process and we have more than 10 functional teams who are actively working on integration planning.

The acquisition will not have much impact on our fiscal 2010 EPS.

We will only own Broadview for about one and a half quarters, but we continue to feel quite good about the $0.07 of EPS accretion for the first full year, going to $0.14 in year two, assuming a 70/30 equity cash split.

Broadview will increase the recurring revenue in ADT by approximately $500 million to nearly $4.4 billion, and increase the percentage of recurring revenue to about 60% of ADT's Worldwide revenue.

The margin impact from the acquisition is also attractive and will ramp up as we deliver on our cost synergies.

We are estimating a 50-basis point margin increase ADT Worldwide from the acquisition, and this is expected to increase to 150 basis points of impact by the second year.

Finally, we put out a second press release this morning announcing our intention to do a tax-free spend of our Electrical and Metal Products business to our shareholders.

We expect to file documents with the SEC over the next few months and conclude the transaction in the first half of fiscal 2011.

As most of you know, Electrical and Metal Products is a high quality business, but it's results are often volatile.

We believe it has a bright future as a separate public company and we believe we are entering the right environment to execute this move.

I want to now turn to each of our businesses and give you a bit of a feel for what we are seeing in our end markets.

In ADT, our recurring revenue continues to perform well.

Good account growth, good RPU, and improvement in the disconnect rate, all of which translated into 4% organic revenue growth.

Revenue in the systems installation business in North America and Europe continued to be soft, but we have seen a nice pickup in activity in Asia-Pacific, where revenue grew 10% organically in the quarter.

Our worldwide order activity in systems installation business was flat sequentially, but we did see good order growth in Asia-Pacific.

We are also beginning to see some signs of life in our retailer business, with an improvement in order activity in the quarter, but this business is still significantly below the peak levels of 2007.

Lastly, in ADT, we continued to make margin progress in our European operations and exited the quarter with an operating margin of 6.5%, as the benefits of our restructuring actions are taking hold.

We would expect our European operating margin to improve by 100 basis points going forward, due to the divestiture of our security business in France.

Turning to Flow Control, our revenue was in line with our forecast.

However, our second quarter results were impacted by a charge for a loss related to a project that we retained as part of the 2008 divestiture of our Earth Tech business.

Absent this, our operating margin was better than expected.

We think the second quarter was the low point in the cycle and we are seeing clear signs of improvement in some of our end markets.

Backlog was flat on a sequential basis at $1.6 billion, and orders were up 3% year-over-year, excluding the impact of foreign currency.

Importantly, our increased quoting activity has begun to translate into order activity and our order outlook for the third quarter is for continued improvement.

It is important to remember that we usually have a six to nine month order to revenue conversion cycle in Flow Control, so the pickup in order activity will be more meaningful to 2011 than to our 2010 results.

That said, we look to the second half of the year in Flow Control.

We expect to see an improvement in our revenue and our income due to a seasonal lift, and also due to revenue from the Australian water desalination project that we announced a few quarters ago.

Next, revenue in our Fire business was about what we expected and we did a nice job on cost and margins.

As we indicated in the press release, backlog grew 1%, which is an encouraging development.

Also, the second half of the year is typically a seasonally stronger period for this business.

Next, Safety Products not only had a good quarter operationally, but also began to see an improvement in order activity.

Orders grew 5% on a quarter sequential basis and the tone of business has clearly improved.

Finally, Electrical and Metal Products performed as expected in the quarter.

We need a stronger second half to hit our full year forecast and the strengthening of steel prices we are seeing, along with the seasonal volume increase, supports a stronger second half.

So overall, the second quarter was a good one for Tyco.

I feel good about our cost focus and I am encouraged by the improving order activity, which is in line with our expected modest pickup in the second half and sets the tone for solid improvement in fiscal 2011.

Now, let me turn the call over to Chris to review our operational performance and a few financial items, and then we will review our outlook for the third quarter and full year.

Thanks, Ed, and good morning, everybody.

Let me start with ADT Worldwide.

Revenue of $1.8 billion declined 1.5% organically.

Recurring revenue, which represented over 55% of ADT's total revenue in the quarter, continued to perform well with organic revenue growth of 4%.

However, since installation and service revenue continued to be soft, with an organic revenue decline of 8% in the quarter.

Despite this pressure on the top line, the operating margin before special items in the quarter of 14.7% increased 230 basis points over the prior year, with improvement in all geographic regions.

Restructuring activities, along with cost containment actions and growth in our higher margin recurring revenue business, more than offset the impact of lower systems installation volume.

From a regional perspective within ADT, our North America residential and small business unit grew its recurring revenue 7% organically in the quarter.

The operating margin before special items improved 2 full percentage points over the prior year.

On a year-over-year basis, we grew our residential account base by nearly 5% and increased our average revenue per user by 3%.

Additionally, our residential attrition rate improved by 20 basis points on a quarter sequential basis to 13.1%.

Turning to our North American commercial business, our end markets continued to be impacted by the economic downturn.

Organic revenue declined 9% in the quarter, but we are starting to see signs of improvement including sequential growth in orders from retailers.

We are encouraged by the improved activity and expect these trends to continue.

Our operating margin improved despite the decline in organic revenue, as the benefits of restructuring and cost containment actions more than offset the revenue headwinds.

Additionally, the North American commercial attrition rate improved 40 basis points to 13.6%.

Moving on to Europe, Middle East and Africa, organic revenue declined 6%.

The operating margin before special items increased to 6.5% compared to 3.1% a year ago, primarily due to the benefits of our restructuring actions.

As I've mentioned, we expect our European operating margin to improve by 100 basis points going forward, due to the divestiture of our security business in France.

In addition, there will likely be some further pruning of our European portfolio, but those transactions will be much smaller in size compared to the security business in France.

In the Asia-Pacific and Latin American regions, organic revenue grew 8% on a combined basis.

Systems installation and service revenue grew 6% on an organic basis, after four consecutive quarters of an organic revenue decline.

Our operating margin before special items continued to be strong and improved 150 basis points year-over-year.

On a worldwide basis, our key metrics also continued their positive momentum.

Our global account base grew 3% year-over-year to 7.4 million accounts, and excluding the impact of foreign currency, our average revenue per user grew 1% to $45.91, with growth in all geographic regions.

The worldwide attrition rate also improved nicely in the quarter, decreasing 30 basis points to 13.1% on a quarter sequential basis.

Now let me turn the Flow Control, which had revenue in the quarter of $899 million and an organic revenue decline of 13%.

Organic revenue growth in the thermal controls business of 2% was more than offset by a 19% organic revenue decline in balance and controls and a 7% organic revenue decline in water.

Before special items, operating income was $101 million and we included a charge of $9 million for a loss related to a project we retained as part of the Earth Tech divestiture in 2008.

Although we are benefiting from cost containment actions and restructuring activities, this was more than offset by the volume deleveraging impact from the $120 million organic revenue decline resulting in an operating margin before special items of 11.2%.

Order growth in the quarter turned positive both year-over-year and on a sequential basis.

Excluding currencies, orders increased 3% year-over-year and backlog of $1.63 billion remained flat on a quarter sequential basis.

Looking ahead to the full year, we continue to expect an organic revenue decline in the high single digits resulting in revenue of approximately $3.7 billion to $3.8 billion.

The volume deleveraging from this organic revenue decline is expected to result in an operating margin before special items of approximately 12.5% for the full year.

It is important to keep in mind that the improving order activity will mostly impact our fiscal 2011.

Turning now to Fire Protection Services, revenue in the quarter was $807 million and organic revenue declines 7%, as we continued to experience softness in systems installation revenue and to a much lesser degree, our service revenue.

Service declined 1% organically.

However, the rate of decline has improved over the last few quarters and we expect service revenue to grow modestly in the second half of the year.

On the other hand, systems installation revenue declined 12% organically in the quarter.

Before special items, operating income was $66 million and our operating margin was 8.2%.

The benefits of cost containment initiatives and restructuring actions helped mitigate the margin pressure from the lower revenue.

As I've mentioned, backlog of $1.2 billion grew 1% on a quarter sequential basis, excluding the impact of foreign currency.

Due to the seasonal nature of our Fire business, we expect a stronger second half of the year.

Moving now to Safety Products, revenue in the quarter was $360 million, with an organic revenue decline of 7%, which was a bit better than we expected.

Organic revenue growth of 1% in electronics security was more than offset by an organic revenue decline of 12% to fire suppression and 3% in life safety.

The rate of decline over the last few quarters has significantly slowed, and we are starting to see an improvement in our order activity.

Before special items, operating income was $52 million and the operating margin was 14.4%.

Despite the continued revenue headwind, the operating margin remained relatively flat year-over-year due to the benefits of cost containment initiatives, restructuring actions, and better product mix.

Additionally, the incremental investment, sales and marketing capabilities, and R&D, cost us about 60 basis points of margin year-over-year.

Although this investment is a headwind to our operating margin performance, our sales and marketing and R&D spend is positioning the business for accelerated revenue growth, as business conditions improve.

Lastly, Electrical and Metal Products performed as expected.

Revenue in the quarter was $336 million and organic revenue declined 3%.

Operating income before special items improved to $26 million, a year-over-year improvement of $50 million, driven primarily by substantially lower material costs for steel products.

As we look to the second half of the year, we expect to see a seasonal pickup in volume.

Coupled with increased prices for both steel and copper products, we continue to expect the operating income before special items for the full year should approximate $120 million.

For the third quarter, we expect revenue of $380 million and operating income before special items of $35 million.

Before I turn the call back over to Ed Breen, let me touch on a few other important items.

For us we continue to generate strong cash flow in the quarter, our free cash flow was $349 million and included $48 million of payments for restructuring.

Year to date, free cash flow of $428 million compared to $239 million last year.

Next, corporate expense before special items in the quarter was $97 million.

This was lower than our previous guidance of $110 million, mostly due to higher cost containment and the timing of certain expenses.

For the third quarter, we expect corporate expense to be approximately $105 million and we now expect that our full year corporate expense will approximate $415 million.

Next, our tax rate excluding special items was 16.6% in the quarter, as we continue to be successful in our tax planning activities.

We are now reducing our full year tax rate guidance to 17% to 18% from our previous range of 19% to 20%.

I also want to touch quickly on restructuring.

To date, we have incurred approximately $32 million of restructuring charges compared to our estimate of $100 million to $150 million for the year.

As Ed mentioned, we'll be ramping up our restructuring spend in the second half of the year and expect that our full year restructuring charges will be toward the high end of the range.

These actions provide very good payback and significantly helped us reduce our cost structure and make our operations more efficient.

Now, let me turn the call back over to Ed to wrap up this morning's call.

Thanks, Chris.

Now, let's turn to our guidance for the third quarter.

First, we expect revenue of approximately $4.25 billion, a modest increase over the second quarter.

Although improving business conditions will result in a nice sequential improvement in our third quarter operating results, this will be partially offset by increased corporate expense and a higher tax rate.

Let me comment on a few of these moving pieces.

As I said, we expect a sequential improvement in operations, particularly in ADT, due to the seasonal nature of our security business, as well as a pickup in Flow Control.

Electrical and Metal Products is also expected to contribute nicely.

This operational improvement is expected to increase our earnings by approximately $0.06 on a quarter sequential basis.

Second, the expected increase in corporate expense to $105 million in the third quarter, which compares to $97 million in the second quarter, will cost us about $0.01 per share.

And finally, we are forecasting a 17% to 18% tax rate adjusted for special items for the full year.

Given the lower tax rate we had in the second quarter, this will result in a sequential headwind of approximately $0.03 per share.

When combined, these items result in a net increase to earnings of $0.02 per share on a quarter sequential basis.

Therefore, we expect earnings per share from continuing operations before special items in the third quarter to be in a range of $0.60 to $0.62.

Based on our year-to-date performance and our guidance for the third quarter, we are increasing our full year earnings guidance to a range of $2.50 to $2.58 per share, compared to our previous guidance of $2.30 to $2.50 per share.

Our full year guidance incorporates better than expected operating results in the second half of our fiscal year, partially offset by increased corporate and tax expense when compared to the first half of fiscal 2010.

We continue to expect full-year revenue of approximately $17 billion, despite the strength of the US dollar over the last few months.

Given that Broadview will only be part of Tyco for a quarter and a half, we have excluded the impact of Broadview from our guidance numbers provided on this call.

Additionally, Broadview will not have a meaningful impact on our full year 2010 EPS.

Finally, we feel good about the operational improvements we have made in our businesses and are encouraged by our increasing order activity.

These items, along with the strategic actions we have made this year, should position Tyco for a stronger 2011.

Operator, with that, let's open up the lines for any questions.

Thank you.

(Operator Instructions) Our first question today is from John Inch with Merrill Lynch.

Your line is now open.

Thank you.

Good morning, everyone.

Good morning, John.

Good morning.

Just wanted to start off with perhaps a clarification.

There have been speculation that it may not have been in Tyco's, or may not be Tyco's interest to have your stock trade above the height of the caller range during this pricing period.

Is there any reason you would not want Tyco shares to move higher over the next sort of eight, nine days?

No, I can't see any reason why a higher share price wouldn't be of value to all our shareholders.

That would be a good outcome.

Okay, and then what does pricing in the backlog look like?

I guess specifically for Flow, given what's happening to raw materials, would you say the profit margins in the backlog are going to be comparable, or how should we think about that?

John, I would say -- and we do analyze this.

The margins I think in the backlog will be about what we would have thought.

We have not felt pressure there of any significance.

I would point out that we've been telling you now for, I don't know, five, six months, that we've seen this increased kind of quoting activity and literally all three months of this quarter, as we mentioned, the quarter in aggregate, the orders were up about 3% year-over-year, but each quarter, or each month of the quarter was positive.

And I did just see this morning our order activity for April in the Flow Control business, and it was up 10% year-over-year.

And our forecast says that our orders will be up around high single digits for the whole -- or the whole third quarter.

So clearly this -- that part of our business is turning.

And, again, the margins that are going into the backlog we're seeing are about what we would expect.

Is it a broad-based turnout?

It is fairly broad-based.

As you know, a lot of this business is in emerging markets, but it's been across our oil and gas specifically we're seeing, I would say, the largest pickup.

But it has been fairly broad-based on what we're seeing.

I'm also making that comment off the quoting activity that's not all into our backlog yet.

So that feels like we're starting to lift off of a bottom.

Again, let me highlight, though, that both Chris and I had mentioned that the conversion in that business, because these are a lot of bigger projects and all, will really benefit 2011 more than it's going to this year, John, because we only have four and a half months left in our fiscal year.

Right, that makes sense.

Lastly, the upgrade by S&P on your debts, does that come with any sort of a parameter in your thinking that would preclude you from maybe aggressively repurchasing your shares post the Broadview transaction, and what are your thoughts toward future share repurchase at this point?

Yes, John, certainly the upgrade, which was a positive for the Company, but it does not restrict us in any way in terms of the use of our excess cash.

So, again, we believe we're in a strong cash position now that we have managed through this downturn well, and even with the acquisition of Broadview and the additional restructuring charges we'll have related to that transaction, we believe we'll have excess cash.

We have about $900 million left on our authorization, and we would expect to start purchasing against that here post the closing of that transaction.

So I would expect that by the end of this fiscal year, we would probably acquire about half of that amount left, about $450 million, $500 million.

Perfect.

Thank you.

Doesn't impact -- credit rating doesn't impact that.

Okay.

So you're buying back maybe 400 to 500 over the rest of the year post the deal?

Probably, yes.

Okay, thank you.

Thanks, John.

Thank you.

Our next question is from Jeff Sprague with Vertical Research Partners.

Your line is now open.

Thank you.

Good morning, everyone.

Hi, Jeff.

Good morning, Jeff.

Just a couple things.

First, on restructuring, Ed, interesting to hear you say you're going to be at the high end.

It sounds like you're finding more to do, which maybe is a little counter intuitive as we see some of this stuff starting to inflect out of the bottom.

Just your thoughts on that and kind of benefits from restructuring going forward.

Yes, Jeff.

Maybe kind of sequencing I put it this way.

We were very heavy last year and extremely heavy on restructuring actions in the back half of the year also.

Our teams were digesting a lot, making sure we -- elegantly executed against that.

So we were -- as we said, we were lower starting out this year, but we had the plans all along to spend this $100 million to $150 million.

We've had significant reviews with our teams in the last weeks and that's why we said we're pretty confident we're going to be near the high end of that range.

These programs, Jeff, still have very good paybacks.

They average out just a little over a two-year payback.

So you can extrapolate the tailwind that that gives us with these extra actions that were taken.

And Jeff, I would categorize most of these actions as back office simplification moves still that we're making.

Within businesses and actually combining some things between businesses in geographic regions.

So, more on that side, not as much on the factory footprint side, which as you know, is not as big in Tyco as many of the other industrial companies.

It's those types of actions.

Right, and just switching to ADT North America specifically, the resi margins obviously sound very impressive.

Just wonder if you could give -- I would guess it's mostly RPU driven, but if you could give us some complexion on just the dynamics that are driving that kind of margin improvement, the sustainability of that.

Well, Jeff, it is -- the RPU is every single month continued to increase in the business.

I wouldn't put this into today's thinking yet, but not -- not too far down the road, one of the things that will hopefully benefit that, too, is when we move to this interactive platform at ADT.

As you know, we've been test marketing this in quite a few markets.

We're feeling positive about it.

We're still working on what our pricing model will be for that, but that's also moving the consumer up to more options that are available and therefore a higher RPU to those that want to take the interactive service.

So we're feeling good about the RPU that we've had, but we're really trying to plan out the next couple years as to how we keep that momentum going, which would obviously be a positive on the margin side.

I would also point out a couple other things you heard Chris mention on North America.

I'm not declaring we've turned a corner here, but with the economy improving some, and some of our internal actions, it was nice to see the disco rates start to drift down globally and specifically on the North America, which is a nice help because that's a high margin business.

When you lose it, it's margin you're losing.

Having that start to drift down is a good sign.

Really the combination of a RMR increasing by 7% and the lower disconnect rate really is helping those margins and we do think that's sustainable.

And then just finally, Ed, to comment about bolt-ons, just sounded a little bit more specific in near term than maybe we heard in the past.

Do you have an active pipeline and kind of what should we think about timing and maybe kind of segments of interest?

Yes, well, Jeff, any of the three segments would be of interest to us, whether it's Security, Fire, or Flow.

I would tell you maybe to relate back to the Broadview acquisition, anything we do with these bolt-ons I think you would consider right down the middle of the plate strategically.

So it's not drifting off into some area that's kind of close to the business.

These would be right down the middle.

And just -- there's nothing more -- I don't want you to read into there's anything more.

There are one or two things that we are actively working on that the ball is pretty far down the road, but you never know if you're going to get them closed or not.

Great.

Thanks a lot.

Jeff, that 500 million that we talk about is really over sort of a 12-month period.

I didn't want to leave the impression it's over the next four months.

Okay, great.

Thank you.

Thank you.

Our next question is from Nigel Coe with Deutsche Bank.

Your line is now open.

Yes, thanks.

Good morning.

Good morning, Nigel.

Just wanted to dig into the second half a little more.

ED, I think you mentioned that Flow orders were up 10% in April and you're looking for a high single digits increase for the balance of the year.

Obviously the comps get easier as we go through the second half of the year.

If we were to run rate to that, would it be moving to the sort of mid teens rates for the growth rates?

Nigel, could you repeat that last part?

Yes, the comps get easier through the year, so if we were to run rate April's orders through the second half of the year, would that 10% get to the mid teens?

For flow?

Yes.

Our forecast, Nigel, it's hard to say the fourth quarter, but if you look at our third quarter that we're in now, I would say by the time the quarter is done, according to our forecast, our orders are a little tougher to forecast than revenue.

You never know when pockets are going to come in, but it looks like we would be between 7% to 10% order growth in Flow for aggregate in the third quarter.

That's a year-over-year comment.

So nice pick up.

By the fact that April was 10% I think bodes well.

Hopefully we're somewhere in that range.

I wouldn't want to put a forecast on fourth quarter orders yet, but because our -- as we said, our quoting activity is pretty broad based, we are bidding on some bigger projects that are out there that hadn't been around during the last year.

I would hope that the growth rate would potentially be in that range again, but I don't know yet.

But the order -- the quoting activity feels decent.

That's great.

And Nigel, my only add to that would be, as we said in our remarks, remember, that the order to revenue conversion in flow typically is in the six to nine-month mark.

It does take a while for that to convert.

Then looking at, as you mentioned as well that Broadview has an impact on the second half, but how does that shake up between 3Q and 4Q?

Do we get a bit of a pinch in 3Q and some accretion in 4Q or do you expect that (Inaudible) broadly even across the quarters?

Yes, Nigel, look.

It's really going to have a very modest impact.

You were talking a penny or two there for the year.

So I wouldn't expect much in either the third or the fourth quarter in terms of EPS.

I mean it's just -- it's so slight, but it might -- it's a slight, slight headwind in the third quarter and a slight, slight tailwind in the fourth quarter.

Okay, and then finally, there's been some rule changes to the Russell S&P indexes, potentially bringing back some of the offshore companies like yourself.

Could you just talk about your effect on that and any competition you have with S&P?

Nigel, we, as a general rule, neither S&P nor the Russell people talk to companies.

They make their own decisions.

They have their own deliberations and then make their announcements.

Clearly, we and folks like yourself and others have followed the changes that each has made in their definitions of what type of companies can be included in the index.

I think from my perspective, when we reincorporated in Switzerland and ourselves and a number of other companies that made similar moves were removed from the S&P and the Russell.

I think they got a fair amount of feedback from their client base that they didn't think that was the right move.

Each has now made some changes, that based on our interpretation would allow them to include Tyco on a go-forward basis.

When they make those decisions is really up to them and I think people who -- people who follow this will closely monitor the things they say to try to guess when that happens.

Obviously if they act in a positive way, we would obviously be pleased with that.

Great, thank you very much.

Thank you.

Our next question is from Scott Davis with Morgan Stanley.

Your line is now open.

Thanks.

Good morning, everybody.

Good morning.

Trying to get a sense of when you sell an asset, like you did the ADT French business, are the multiples comparable kind of to what you're buying in the US?

Is it dilutive to sell these assets, or is it neutral and just better to redeploy the assets -- the cash somewhere else?

Yes, again, this was a business that we struggled with on the -- the multiples are different, really depend on the makeup of the business.

It's customer base, whether it's commercial or residential type of business like they have in the US, but this will certainly be accretive as well to margins and earnings going forward.

Okay.

So fairly good -- fairly good sales prices.

Are there other things to do?

I don't think that's the only business that you have that has kind of a less attractive mix.

Yes, as I mentioned, Scott, in my remarks, we will continue to do some pruning of the portfolio, but nothing of the magnitude of the individual market in a core business like security.

So we will continue to look at pruning, as well as continuing to acquire some bolt-ons that we think have a better growth perspective and margin going forward.

You mean bolt-ons globally or bolt-ons in the US or ADT?

Well, again, not just within ADT.

Okay.

Across the three businesses.

Okay.

We are looking -- we're looking at emerging markets as well to bolster our presence there through bolt-on acquisitions.

Okay.

That's fine.

Can you talk a little bit about, you've got this new product in ADT, which is coming out sooner than later, I think with some fanfare.

What does this mean?

Does this mean you come out, you do a big ad campaign, there's kind of a fairly large upfront expense to hopefully get nice results down the road, or is this something that's kind of rolled out slowly to the -- to the sales force?

How do you kind of plan on going to market with something like this?

Yes, I -- Scott, I think you're going back to my comment on the interactive platform.

Yes.

At ADT.

I think what you would see from us when we market it, and by the way, we haven't made a full decision, one day turn the switch and it's a national rollout or we actually kind of market by region just to make sure we don't trip at all.

So there's a couple open issues there.

Again, as I mentioned, we're looking at the pricing model of where we price this at.

But let me just say, I think positive, no matter where we end up, because of what we have.

And you would see initially, again, it depends if it's regional versus national, but I think you would see our advertising budget, especially our TV spend, go up during the first six, eight, nine months of a rollout.

Again, whether it is regional or national, that will just change the numbers around a little.

But you'll see a little bit of a lift on that side.

Scott, I would add to that, that as this rolls out, as Ed mentioned, we're in the process of taking a look at how we roll it out.

It will add nicely to the ROIs that we look at in terms of bringing on new accounts and will add nicely -- we haven't determined the final pricing, but it will add nicely to our average revenue per user and our recurring revenue.

So there's some very, very positive, attractive things about moving forward in interactive services.

Scott, I just underline what we always try to keep in mind in this business.

Maybe I go to the disco rate.

Is these should end up being very high quality accounts that you bring in.

These are accounts that want more options, are clearly willing to pay more for these features, and that always translates -- more money up front.

That always translates into a better customer base.

So I just -- the underlying basics behind this should be very positive.

Agreed.

Just lastly, just a quick cleanup item, can you refresh my memory on the size of this Australian desal contract and kind of over how many quarters you're shipping product into it?

It's about $120 million and it will be probably in the two to three quarter range.

Okay, that's great.

Thanks so much.

Thanks.

Thank you.

Our next question is from Steve Winoker with Sanford Bernstein.

Your line is open.

Good morning.

Good morning, Steve.

First question, just on the repurchase resumption you talked about, you said $450 million to $500 million over the next 12 months, was that right?

No, sorry, Steve.

What I meant was that by the end of our fiscal year.

Okay.

So really during the --

Four and a half months.

During our third and fourth quarter.

Okay.

As you think about that going forward, sort of a higher level perspective, is your intention to at least offset the full amount of the transaction dilution, or could you give us some sense for the strategy on that front?

Yes, Steve.

I don't want to comment fully on that yet.

As Chris mentioned, we do have $900 million outstanding.

So obviously we're going to -- we're going to spend that against our authorization.

And this will be a conversation of -- we will actually have with our board during our summer board meetings to make a determination on kind of what this fiscal 2011 look like past what we've just said here.

So we'll have more to say in the next earnings call, or at our end of year earnings call.

Okay, great.

And then on the Electrical and Metal Products spend, how are you planning on accounting for that between now and the actual closing?

Steve, that will be accounted for just as it is today.

So that's under the accounting rules when you're planning a spend, it just stays in continuing operation until the spend actually -- transaction actually closes.

Okay, and on the Flow Control side, on the, on margin, I was -- I know a lot of it was due to volume deleveraging, as you mentioned, but how much productivity did you get in the business and how should we think about the fixed cost base of that going forward as volume starts to come back?

Well, Steve, the margins, you kind of look at the last I guess two years when we started to see some softness here.

As I look back at it, and let's see, fiscal 2008, we held the margins at 14 -- about 14.3% for the year.

And then when we ended the 2009, through all the restructuring actions and cost containment actions we took, by the time we ended 2009, the margins were still at 14.3%, despite a give or take a $600 million decline in revenue.

And now this year, we're having the first two quarters have been our, as we said, our trough quarters here with revenue declining even more, so we've been having a harder time holding that margin there.

So as Chris mentioned in the guidance, we think the margins for this year will be about 12.5%, so we just couldn't keep up with the fixed cost base that we have in that business as much, but I think you can see a lot of actions we took really held us in there, considering revenue has dropped from $4.4 billion at the peak to around $3.7 billion to $3.8 billion.

And again, with the order activity turn, and once you start pumping more revenues through that fixed cost base, we should be in good shape.

Maybe I could give it to you one other way.

If we're in the trough with margins around 12.5%, that's 300 to 400 basis points better than the trough of this business back earlier in the decade.

And probably even more than that.

But, we've really honed down the overhead of this business and hopefully, again, as revenue comes back, we'll get that benefit.

Great, and last question, just at a higher level competitive strategy point, particularly with the interactive platform for ADT, are you seeing any more signals from new entrants, cable companies, and other subscription models out there that are trying to cross over in any way or collaborate with ADT or move into your domain?

We've talked with quite a few other players over the last couple years, and there could be others that give us a try from a different angle, and by the way, there might be partnering opportunities for us.

That's what we've been talking to people about, but I think it's just -- it's just too early, Steve, to tell on that if there's someone wants to do it or not.

It could be an interesting partnering opportunity, but I think it's just too early to know that.

Great, thanks.

Thank you.

Our next question is from Steve Tusa with JPMorgan.

Your line is now open.

Good morning.

Good morning, Steve.

I might have missed this, but what was the third quarter margin for Flow?

We didn't -- we didn't provide specific margin guidance.

We did say that it would be -- we would see a nice improvement in Flow in the third quarter.

Okay, and then for the total company, is it kind of 50 bips per quarter, third and fourth quarter sequentially?

We -- Steve, we didn't provide that specific guidance.

If you go back and you look at the slides and you take a look at the transcript of the call, there's a lot of -- there's a lot of detail, but we didn't specifically quantify the margin impact.

Okay.

And then lastly, what was the order rate for the non-res businesses in April?

What are you seeing there and some of your non-res installation stuff, the stuff that's non-recurring?

Overall, Steve, it was flat.

So that -- we didn't see improvement.

If you kind of go through the pieces -- I'll give you the green chutes, and I guess no green chutes yet.

Flow clearly improved.

Electrical and Metal improved some off of a very severe bottom, and our TSP business improved some.

And I wouldn't -- that, I'm not surprised by.

That's our shortest cycle manufacturing businesses that we have.

So that didn't surprise me.

Flow didn't surprise me, only because the order activity.

But Flow, I would consider more mid to late cycle, but we are seeing it there.

The other area where we're seeing it is in Asia across the board even in the non-resi stuff we saw pickup as we mentioned.

And we're seeing some pick up by, I'd say modest, but pickup in our retailer business, which was severely impacted starting about two years ago, or year and a half ago.

So that's kind of the green chute areas.

Where we're not seeing the lift yet, and again, I'm not surprised by this, is in the non-resi commercial installation businesses in North America and Europe.

I would think they would be the last ones to come back.

Got you.

And then one more question on housekeeping.

4 X impact in the back half of the year, can you give us any color on how that's hitting your guidance at all?

Steve, let me give you -- I'm going to give you the full year and maybe offline we can look at the back half.

But full year, we came into the year thinking that revenue would benefit from about a 5% tailwind for the full year.

Based on how currencies have moved, we're now estimating that to be about 4% tailwind.

While many of you watched the Euro, and the Euro has been impacted quite a bit, we have a fair amount of business in both Australia and Canada and those currencies have held up quite well, as well as a couple of other currencies where we do business.

So overall, the revenue impact is 5% headwind, down to -- 5% tailwind down to 4% tailwind.

Okay.

Thanks for the help.

Modest headwind versus the last quarter when we talked.

Okay action thanks.

Thanks, Steve.

Operator, I think we have time for two more questions, if you have two more in the queue.

Thank you.

Our next question is from Gautam Khanna with Cowen and Company.

Your line is now open.

Yes, thanks.

Hi, Gautam.

How are you?

Doing well, doing well.

Thanks for taking the question.

I wanted to just ask about the French ADT business, this was losing $15 million a year, is that right?

Yes, it was a money-losing operation.

About in that range.

Was it in the numbers at all, in the Q2 numbers, or was it totally excluded?

No, it is a continuing business.

It will not be accounted for as a discontinued operation.

So it is in our numbers through the -- for the majority of the quarter.

Okay, and are there other EMEA ADT properties that are losing money in that kind of magnitude that you might jettison --

No, not at all.

No, but there are few pieces we do want to jettison, as Chris mentioned, not nearly of the magnitude of France, but we just think are going to be -- not hit our parameters for growth strategic fit and modestly profitable, so there will be a little bit more pruning we'll be doing.

Okay, and --

(Inaudible) some of these markets with some of our products in a different manner.

Got it.

And just quickly on Flow, the valves business down 19%, do you think it troughs this quarter, given kind of the order rates we're seeing in oil and gas?

And could you see that actually turn positive maybe by Q1 of next year, given the lead times in converting some of these orders?

Well, when you look at the order rates, Gautam, the orders were up in the valve business very nicely in the quarter, which helped that 10% order growth year-over-year.

So, again, by the time it hits revenue it's six to eight months down the road, I don't know if it's first quarter next year, but clearly sometime in the first half of next year, we'll see some of that benefit.

And lastly, with respect to restructuring, could you help us allocate it to the segments, where's the preponderance the dollar is going to be spent and what types of actions are you contemplating.

Looking beyond 2010, do you think restructuring ex the Broadview integration will be dropping off from the 150 this year?

Let me try to answer that as best I can here.

If you take a look at where our restructuring spend has gone and the detailed schedules we give you both in the press release, as well as up on the website, give you pretty good road map as to where our spend has gone.

I think it's fair to conclude that what we'll do over the remainder of the year will in large part track -- track where it has been.

In other words, on a percentage basis, I wouldn't expect to see much in the way of deviation.

Okay.

And then your second question I think was thinking about next year?

Yes.

And it was -- it was what?

Do you think you're going to do 150 year roughly.

Next year, do you anticipate the number will be less, ex the Broadview?

At this point, obviously we'll give you a full detailed review when we get to our fourth quarter call in November, but I would expect the restructuring activity ex Broadview to come down very significantly next year.

Thanks a lot.

Appreciate it.

Thank you.

And your final question today is from Bob Cornell with Barclays Capital.

Your line is now open.

Yes, what happens when you forget to dial in earlier.

Welcome back, Robert.

Thanks.

Couple of big picture questions on the call.

Obviously with Broadview and the French business, you made a statement about what you think about ADT.

I wonder, with some of your customers going global, do you see a need down the road to expand the global footprint in that business?

We are really pretty much everywhere as right now, Bob, so I don't think we need to expand to service our global customers.

We may do this in a little bit different manner than we've had before in terms of more regional resources rather than having full integrated businesses in each and every market, no matter what the size.

That's where we're looking at consolidating some back office.

You can do some installation work from different markets.

So clearly we are focused on maintaining that relationship in a unique, competitive position that we have in that we are just about everywhere in the world and can service these global partners for us.

Bob, our big focus also in ADT just positioning for the future is obviously, like everyone else, it's emerging markets.

And just to give you a feel for it, we doubled our offices, ADT offices in China last year, in one year.

And we plan on making a big move again this year.

Now, again, that's mostly, that's not a residential business.

That's a commercial business in most of these emerging markets.

But we're making sure we're getting position there and you see that from us.

We're doing the same thing in India, doing the same thing in the Middle East, all those emerging markets.

Thanks.

Now, one final question there.

You addressed this a couple times in the Q&A.

But if you look at the number of businesses that served non-res markets.

Is it possible looking at the inquiries to detect when that business in the aggregate across a number of the end markets, when that goes positive in terms of sales?

Well, you got -- I think you also have to look at it a little bit by vertical.

Again, Bob, I'm not surprised.

I think for us when you look at our mix, it will be the last piece of it that will come back, but I think you have to go geographically and by vertical.

For instance, as we mentioned, the retail vertical is coming back, again, off of a very low base, but we're seeing lift there.

And I'm not surprised by that.

Retailers are doing better.

You're seeing all the numbers they are posting, so they are opening up the walls a little bit.

Then I think you have to look at it by geography.

As we mentioned here, I'm actually a little surprised it bounced back the way it did.

The Asia region really came back nice on the non-resi side, which is again the commercial systems installation part of our business.

That came back very nice and the order activity looks good there.

And then the emerging market activity and the other key emerging markets is starting to pick up.

So I think the last two areas will see pick up.

My opinion is the North America and the European part of our systems installation business.

Okay, got it.

Thanks.

You are doing a lot of interesting things for sure.

Thank you, Bob.

Thank you, Bob.

Ladies and gentlemen, thank you for joining our third quarter -- our second quarter conference call.

I apologize.

We look forward to reviewing our third quarter results with you when we do our third quarter conference call in late July.

Operator, I'll turn it over to you at this point to provide the replay instructions.

Thanks for joining us.

Thank you.

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